fund flows during covid-19»government acted to restore flow of credit »fund flows reflected market...

Fund Flows During COVID-19Sean CollinsChief EconomistInvestment Company Institute

May 27, 2020

Overview

» Importance of funds to households and financial markets»COVID-19: Massive real shock that impaired financial markets»Government acted to restore flow of credit»Fund flows reflected market conditions»Conclusions

Fund Flows During COVID-19 1May 27, 2020

Importance of Funds to Households and Financial Markets


Funds Are a Key Savings Vehicle for Households

Assets in registered investment companies

$23 trillion

Share of household financial assets held in funds

23%

Number of Americans owning mutual funds

102 million

Proportion citing retirement saving as primary financial goal

73%


Fund Assets Are Spread Across Markets

Domestic equity funds: $8.6 trillion (38%)

World equity funds:$2.9 trillion (13%)Bond funds:

$5.2 trillion (23%)

Money market funds:$4.3 trillion (19%)

Hybrid:*$1.4 trillion (6%)

May 27, 2020 Fund Flows During COVID-19 4

Percentage of assets, March 2020

*This category includes ETFs—both registered and not registered under the Investment Company Act of 1940—that invest primarily in commodities, currencies, and futures.Source: Investment Company Institute

US mutual fund and ETF total net assets: $22.5 trillion

Funds Channel Households’ Savings to Companies, Federal Government, and Municipalities


Percentage of total market securities held by registered investment companies, 2019

* Includes US and foreign corporate bonds, as reported by Federal Reserve BoardSources: Investment Company Institute, Federal Reserve Board, and World Federation of Exchanges

24 17 1325 25

84

1

4

6879 86

71 75

US equity Corporate bonds* Treasuries & agencies Muni securities Commercial paper

Mutual funds Other RICs Other investors

COVID-19: Massive Real Shock that Impaired Financial Markets

6Fund Flows During COVID-19May 27, 2020

COVID-19: A Massive Shock to Real Economy

-40

-30

-20

-10

0

10

20

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Fund Flows During COVID-19 7

Percentage change in real US GDP, quarterly, seasonally adjusted annual rate

* Note: 2020:Q2 is a Bloomberg forecast as of May 19, 2020.

*

May 27, 2020

Spread of Coronavirus and Effect on Markets

2,000

2,200

2,400

2,600

2,800

3,000

3,200

3,400

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jan-22 Jan-31 Feb-11 Feb-21 Mar-3 Mar-12 Mar-23 Apr-2 Apr-13 Apr-22 May-1

Worldwide coronavirus cases (left scale)

S&P 500 (right scale)


Thousands of coronavirus cases (left axis); level of S&P 500 (right axis)

May 27, 2020

Volatility Surpassed Levels Seen in 2008

0

10

20

30

40

50

60

70

80

90

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020


Level of VIX, daily

Source: Cboe Exchange, Inc.

May 27, 2020

Yields on Long-Term Corporate Debt Jumped

0

2

4

6

8

10

12

1/2 1/9 1/16 1/23 1/30 2/6 2/13 2/20 2/27 3/5 3/12 3/19 3/26 4/2 4/9 4/16 4/23 4/30

High-Yield

BBB


Yields on high-yield and BBB-rated bonds, percentage, daily

Source: Federal Reserve FRED

May 27, 2020

0

0.5

1

1.5

2

2.5

3

3/2

3/4

3/6

3/1

0

3/1

2

3/1

6

3/1

8

3/2

0

3/2

4

3/2

6

3/3

0

4/1

4/3

4/7

4/9

4/1

4

4/1

6

4/2

0

4/2

2

4/2

4

4/2

8

4/3

0

Yield on 30-day AA ABCP

0

1

2

3

4

5

6

3/2

3/4

3/6

3/1

0

3/1

2

3/1

6

3/1

8

3/2

0

3/2

4

3/2

6

3/3

0

4/1

4/3

4/7

4/9

4/1

4

4/1

6

4/2

0

4/2

2

4/2

4

4/2

8

4/3

0

SIFMA 7-day Muni Yield Index


Source: Federal Reserve Board; SIFMA

And Short-Term Credit Markets Were StressedYields on 3-month commercial paper and SIFMA municipal swap index, percentage, daily

May 27, 2020

Federal Government Acted to Protect Economy

»Federal Reserve»Cut rates, purchased gov’t securities, boosted swap lines» Lending facilities: MMLF, CPFF, PDCF, PMCCF, SMCCF, TALF, PPPLF,

MLF, Main Street Lending»Congress»CARES Act – provided capital for Treasury to backstop Fed facilities

»SEC» Supported open and orderly equity markets»Provided exemptive relief for funds


Fund Flows Reflected Market Conditions

13Fund Flows During COVID-19May 27, 2020

6

-7

3

-13 -4

8 8 1

49

94

159

286

175

7850

128

82

34 20

-2

8 15 22 29 5 12 19 26 4 11 18 25 1 8 15 22 29 6 13 15*

Prime retail

Prime institutional

Tax-exempt

Government

Investors Sought Liquidity in Government MMFs


Change in money market fund assets, billions of dollars, weekly

*Government includes “Treasury” and “Government” funds from Crane Data.Sources: Investment Company Institute and Crane Data

January February March April May

May 27, 2020

348151

-386

-37

83 35

-75

169

Jul Aug Sep Oct

2008

836

342

-139

46

-18

33

691

397

Jan Feb Mar Apr

2020

Tax-exempt

Prime

Government


Source: Investment Company Institute

Money Market Funds: 2020 vs 2008Changes in assets, billions of dollars

May 27, 2020

31 53 53 51 49 46 43 40

3/18 3/25 4/1 4/8 4/15 4/22 4/29 5/6 5/13

2020

MMLF

CPFF

145

243 257

73

152 139 123 108

96

85 77

9/17 9/24 10/1 10/8 10/15 10/22 10/29 11/5 11/12

2008

AMLF

CPFF


Source: Federal Reserve Board

Use of Federal Reserve Liquidity Facilities: 2020 vs 2008Asset levels reported on Fed’s balance sheet; billions of dollars, weekly Wednesday

May 27, 2020

2011 13 12 8 11 11 2

-24-32

-93 -91

-34

-12 -1

4 2 10 8 3

8 15 22 29 5 12 19 26 4 11 18 25 1 8 15 22 29 6 13* 15*

MunicipalGlobalMultisectorGovernmentHigh yieldInvestment grade

Flows to Bond Mutual Funds


Billions of dollars, weekly

*Data for May 13 and 15 are estimated from Morningstar daily data.Sources: Investment Company Institute and Morningstar

Memo: percent of previous month assets0.43% 0.23% 0.28% 0.26% 0.17% 0.22% 0.23% 0.04% -0.49% -0.66% -1.90% -1.85% -0.77% -0.27% -0.03% 0.10% 0.05% 0.23% 0.19% 0.06%


May 27, 2020

-5.2

-2.4

-3.9-3.0

-4.3

-0.9

-4.5

2.4

-8.1

-4.5

-7.9

-5.5-4.9

-2.3

Mar 2020 Oct 2008

Total Invest. grade High yield* Govt Multisector Global Municipal

Flows to Bond Mutual Funds: 2020 vs 2008


Percent of assets

*Data exclude high-yield funds designated as floating rate funds. Source: Investment Company Institute

May 27, 2020

3.5 3.3 3.1 3.2 3.0 3.3 2.6 3.0

-0.5-3.1

-20.4 -20.1

-1.4-2.9

1.3 0.6

-1.8

0.4 0.5 0.3

8 15 22 29 5 12 19 26 4 11 18 25 1 8 15 22 29 6 13 15

Coronavirus and Municipal Sector


Net flows to municipal bond funds, billions of dollars, weekly, Jan 8, 2020–Apr 27, 2020

Note: Includes mutual funds and ETFs; municipal bond mutual fund data from May 13 and 15 are estimated from Morningstar daily data, and municipal bond ETF data from May 13 and 15 are estimated from Bloomberg daily data.Sources: Investment Company Institute, Morningstar Direct, and Bloomberg

Memo: percent of previous month assets0.41% 0.38% 0.36% 0.37% 0.34% 0.37% 0.30% 0.34% -0.06% -0.34% -2.23% -2.20% -0.18% -0.35% 0.16% 0.07% -0.21% 0.05% 0.06% 0.04%


May 27, 2020

32.4

3.4

18.0

5.0

31.2

2.8

32.2

10.4

Investment Grade Corporate Government Municipal High-Yield

Purchases* Sales†

‘Dark Matter’: Funds Aren’t the Only Investors in the Universe


Funds’ share of trading volumes in selected types of fixed income securities, March 2020

* Calculated as (gross fund purchases / (1/2 trading volume on relevant market) † Calculated as (gross fund sales / (1/2 trading volume on relevant market)Sources: Investment Company Institute, FINRA TRACE

May 27, 2020

High Yield Bond Mutual FundsNet flows as a percentage of assets; monthly, January 2006–March 2020

Note: Data exclude high-yield funds designated as floating rate funds. Source: Investment Company Institute

-20

-15

-10

-5

0

5

10

15

20

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Bottom 10th

percentile of funds

10% of high-yield funds saw inflows greater

than this

Financial crisis

Eurozonecrisis

Taper tantrum

Global pandemic


Fund Flows and Changes in Assets: Not the SameNet flows and changes in assets of bank loan funds (percent of previous month’s assets)

Note: Includes assets in mutual funds and ETFs.Source: Investment Company Institute

-25

-20

-15

-10

-5

0

5

10

15

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Net flows Change in assets

Financial crisis

Eurozonecrisis

Global pandemic


Target Date Funds Can Provide Some Counterbalance to Financial Markets


Hypothetical example for March 19, 2020

Target allocation

Total return

Allocation outcome

Likely action

Domestic equity1 50.0% +1.1% 50.3% Sell

International equity2 20.0% -0.2% 19.9% Buy

Government bond3 15.0% +1.2% 15.1% Sell

Corporate bond4 15.0% -1.7% 14.7% Buy

1. Total return on the Wilshire 5000 Index for March 19, 2020.2. Total return on the MSCI All Country World ex US Index for March 19, 2020.3. Total return on the ICE BofA US Treasury & Agency Index for March 19, 20204. Total return on the ICE BofA US Corporate Index for March 19, 2020Source: Investment Company Institute and Bloomberg

-13-1

2

-9

138

0

-14-20

16

-11

-41

126 5

-9

-20 -22

-4 -6

8 15 22 29 5 12 19 26 4 11 18 25 1 8 15 22 29 6 13* 15*

Flows to Equity Mutual Funds and ETFs


Billions of dollars, weekly

*Equity mutual fund data for May 13 and 15 are estimated from Morningstar daily data, and equity ETF data from May 13 and 15 are estimated from Bloomberg daily data.Sources: Investment Company Institute, Morningstar, and Bloomberg

Memo: percent of previous month assets

-0.09% -0.01% 0.02% -0.06% 0.09% 0.05% 0.00% -0.09% -0.15% 0.12% -0.08% -0.30% 0.11% 0.06% 0.04% -0.08% -0.17% -0.19% -0.04% -0.05%


May 27, 2020

8.9 14.3

-39.1

5.5-6.2

-18.3

-24.0

-4.3

2.7

-4.0

-63.1

1.2

Aug Sep Oct Nov

2008

-24.5 -28.2

-7.7

15.916.610.4

-18.1

-14.2

-8.0-17.9 -25.9

1.7

Jan Feb Mar Apr*

2020

World Domestic


*Estimated from weekly data through April 22.Source: Investment Company Institute.

Flows to Equity Funds: 2020 vs 2008Equity mutual funds and equity ETFs, net cash flow, billions of dollars

May 27, 2020

ETF Trading Volumes Rose

20%

25%

30%

35%

40%

45%

2/3 2/10 2/18 2/25 3/3 3/10 3/17 3/24 3/31 4/7 4/15 4/22 4/29 5/6 5/13


ETF trading volume as percent of stock market trading volume; daily

Sources: Investment Company Institute tabulations of Bloomberg and Cboe Exchange, Inc. data

May 27, 2020

ETFs Provided Price Discovery

-160

-140

-120

-100

-80

-60

-40

-20

0

20

02 03 04 05 06 09 10 11 12 13 16 17 18 19 20 23 24 25 26 27 30 31

Bond ETFEquity ETF


Median premium (+)/discount (-), basis points

Source: BloombergMarch

May 27, 2020

Conclusions

»What worked well:» Equity markets (including equity mutual funds and ETFs) traded freely» Funds’ BCP worked, supported investors despite remote work»Government’s response to financial markets was strong, effective

»Areas for fact-gathering:» Functioning of money and bond markets» Size and role of all participants in fixed income markets» Interaction among all market participants and its impact on markets» Broker/dealer balance sheet capacity


Thank you


fund flows during covid-19»government acted to restore flow of credit »fund flows reflected market...

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